System failure

Analysing the reason that system failure occurred, especially the case of Vinashin, professional Nguyen Tran Bat, CEO of Invest Consult, said it was owing to lack of sufficient information for controlling. He said:

Assuming that we have a good control system, losses or disasters up to the first few trillion might be incurred undetected. However, allowing the loss to extend to 80,000 billion means that the system has problems. We do not have in the Government administration system an alarm mechanism sensitive enough to be able to prevent a disaster at the beginning. So, we definitely have to acknowledge that not only individual faults resulted in this failure, but that it also was a failure of system quality, and that system failure is the lack of an alarm system for the financial risk. The Vinashin phenomenon revealed to the Party, the Government and Parliament that if there were more intelligent thieves, they might make off with all national assets, because we do not have such an alarm system. (Viet Lam & Khanh Linh 2010; translated by the author)

The failure to provide adequate information for controlling the financial risk of SOE lending is so common in Vietnam and so widely influenced by the inefficiency of lending activities and capital allocation that it is considered ‘a system failure’ that is ‘the lack of an alarm system for the financial risk’.

The lack of motivation to publish information for the market related to VDB’s activities can be explained by considering that the availability of the capital fund from the state budget to VDB minimised its need to publish financial reports for raising funds. This explanation is consistent with the study of Piotroski and Wong

(2012) on China that the prevalence of state debt limited the need of state-controlled listing firms for external reports to accomplish a debt-contracting role.

Similar to VDB, other SOCBs and even JSCBs did not have sufficient motivation to offer information to the market following the revised regulations of Decision 493 and Decision 18. Particularly, because of its multiple and frequently conflicting objectives, as discussed in more detail for phase 1, the Government did not evaluate bank performance by solely using bank financial statements, thus reducing the demand for strictly forcing SOCBs to follow Decision 493 and Decision 18 in terms of loan loss recognition regardless of those regulations being revised in line with international practices.

This inference was made based on Piotroski and Wong’s (2012) assertion that the reliance on other measures, rather than profit, when assessing the performance of state-controlled listing firms in China reduces the demand for high-quality external financial reports. The Government’s permission for commercial banks to not make provision or classify for credit risk management the debts related to Vinashin (Tinmoi 2012) or the drainage project (Nguyen Thanh Vinh 2015) as discussed above are obvious examples for this claim.

In addition, the state control of SOCBs not only continued but also partly extended to JSCBs via cross-shareholding. Hence, the state concentrated ownership arrangement and the contracting role of accounting in Vietnamese commercial banks, especially SOCBs, are different from that of a commercial bank in a developed market with dispersed ownership.

With that cross-shareholding structure, ownership is concentrated in the hands of the Government with no clear separation of ownership and control in the organisation. Therefore, the banks do not face a serious agency problem that requires the public transparency of accounting information. A similar finding of Piotroski and Wong (2012) for China was that the dominance of the Government in the ownership structure can significantly reduce the demand for, and supply of, transparent information.

Specifically, Piotroski and Wong (2012) found:

The Government owner of listed state firms can use private channels and their political networks, instead of public accounting and information reported to the markets, to measure and assess managerial performance, thereby reducing the demand for high-quality external information. (p. 219)

That finding is applicable to the banking industry in Vietnam as well. The Government can collect information directly from commercial banks by employing its private channel, as explained by a banking specialist, Le Xuan Nghia:

SBV builds software for remotely monitoring NPLs independently and objectively. The result is always different from reports of commercial banks. For example, in 2006, commercial banks reported NPLs of 3.7% whereas SBV’s figure was 7%. (Le Ha 2015; translated by the author)

That fact can explain the two different figures from credit institutions and SBV—as discussed in Chapter 1, the Governor indicated that this has been the case for more than 30 years (Vietnamnet 2012). The difference was not SBV’s concern because it, being the major owner of commercial banks, can collect its own information via its private software for control purposes. The difference was not of significant interest to the public (e.g., bank depositors) either. Vietnamese depositors are less likely to rely on the financial information supplied by the banks when making their depositing decisions, which was also found for China where the major control is with the state (Piotroski & Wong 2012). Instead, the public focuses on the bank’s political background.

For example, Agribank is a 100% state-owned enterprise with a key role in implementing Government policy (Agribank 2016). However, it had a bad reputation in risk management owing to a huge NPL amount that accounted for a quarter of the entire banking industry’s NPLs at the end of 2012 (Info.net 2014). In particular, the debts in group 5, potentially irrecoverable, accounted for nearly 90% of the bank’s charter capital (Info.net 2014). In spite of this fact, its deposits from customers have continued to increase sharply since 2012, making it the leading bank in raising deposits in Vietnam although it offers the same interest rate as the other banks (Nguyen Loc, Hooper & Sinclair 2013; Quan 2017). The local depositors expected

the Government to bail the bank, in case it experienced financial distress, because of its critical importance to the Government. As such, the local depositors did not create a demand to the bank for high-quality external reports.

Recognising that the lack of transparency in loan loss recognition amplified the economic inefficiency in capital allocation to SOEs, one expert suggested:

Should the state disburse credit through the commercial banking system because the risk management structure of commercial banks is safer than that of VDB? Commercial banks have their internal risk management system because they are inspected by the SBV and have to publish their annual financial statements through an independent audit. (Nguyen Hoai 2011b; translated by the author)

That suggestion represented the struggle between the Government control and market control in which more information related to state lending was required to be disclosed for market discipline (public) and for the other party (SBV) to improve its lending efficiency.

In addition to the transparency problem, the framing of public ownership as representing a socialist orientation was considered the root cause for the failure of SOEs, such as Vinashin, in leading the economy. Related to the huge loss of Vinashin and other SOEs, the policy to maintain the leading role of state economy in the market was also re-examined. The former president of the National Assembly, Nguyen Van An, said:

I believe that Vinashin was the consequence of the global economic crisis but the system error was the root of that phenomenon, the error from the superstructure, from the policy of the Central Executive Committee of the Political Bureau, stemming from the point of view that socialist society must be based on ‘... the public ownership regime of main production means’. This model derives from the radical theory that private ownership of the production means is the source of exploitation. This extreme theory resulted in an economic model that lacks motivation, and thus was denied in reality. The Government had implemented this policy following the ideology of the Communist Party. (Vietnamnet 2010; translated by the author)

More specifically, VDB’s favour lending mechanism to the state business sector was criticised as a manipulation of market discipline. Cong Thuong (2013) claimed that VDB’s preferential loans distort market or are ‘nonmarket’:

Here, capital fund (from the state budget) is abundant, interest rates are low (owing to the mechanism of subsidised interest rates) and the repayment period and other loan conditions are easier than in commercial banks.... It is time to reconsider the policy of ‘special deals’ that VDB made because that policy is for a nonmarket economy. (Cong Thuong 2013; translated by the author)

Learning from this lesson, Resolution 01/NQ-CP of the Government, on major tasks and solutions on directing and managing the implementation of the socioeconomic development plan and the state budget plan in 2016, has suggested for the first time, ‘It is necessary to study how to transfer gradually the lending guarantees to commercial banks’ (Resolution No. 01/NQ-CP in 2016, article 2; translated by the author). It can be inferred from this statement that the bank regulators have recognised the large risk for the economy when turning commercial debt obligations into national debt obligations through the Government guarantees for lending. Their suggestion is a response to have market control instead of Government control in lending guarantees for SOEs to improve the lending efficiency.

Generally, the regulation on loan loss recognition in phase 2 was neutralised by two channels. First, they were overtaken by the commercial banks, taking advantage of cross-shareholding and regulation weaknesses as discussed in Section 5.3.2. Second, the Government invalidated the regulation as analysed in Sections 5.3.2 and 5.3.3.

The insufficiency of loan loss recognition was undetected until the present when the loss was exposed. For example, according to the Government inspector, in 2009, Vinashin actually lost nearly 5,000 billion dong, which is 3,300 billion dong more compared with its published financial statements audited by KPMG (Tran Nam 2018)10. The leader of the Inspection Agency in SBV has now confessed about the difference in NPL ratios in 2012, as mentioned in Chapter 1:

10 _{Auditing in loan loss recognition is beyond the scope of this research owing to the lack of sufficient}

The difference between two figures is owing to computational and statistical data obtained from two different sources. Specifically, the NPL ratio of 4.9%, equivalent to 133,060 billion, was reported by the credit institution. The figure of 17.4% was from the inspection authorities after auditing all NPLs hidden in corporate bonds, credit trusts and restructured debts, including two ‘shipwrecks’, Vinashin and Vinalines. Therefore, the total bad debt [NPL] actually amounted to 465,000 billion. (Tieu Phong 2015; translated by the author)

This announcement is a late answer for the question raised in a press conference about the large difference between the two figures: 4.94% (reported by credit institutions) and 17.4% (reported by SBV) as at 9 May 2012. The disclosure was not made until the end of 2015 when it seemed likely that the increase of NPLs had been under the control of SBV with the NPL ratio already pulled down to the safety threshold of 3%, as described in phase 3.